You are a conservative investor who is considering investing in “Fly Away Films”, a small film company. You like the intrinsic valuation approach and want to calculate Fly Away Films’ weighted average cost of capital and then perform a discounted cash flow analysis. You note that the equity market risk premium is 5.8%. The risk free rate is 2.5% and the tax rate is 35%. You feel that Fly Away Films is riskier than the CAPM would indicate due to its small size and believe it has a size risk premium of 1.2%. You have the following information about Fly Away Films: • Bonds: Fly Away Films has two bonds as outlined below: o Bond One: six year maturity, $1,000 face value semi-annual coupon bond with a coupon of 1.73% and a yield to maturity of 4.23%. Fly Away Films has 25,637 of these bonds outstanding. o Bond Two: is a coupon bond that pays annually and has nine years to maturity. The coupon rate is 2.75%, its yield to maturity is 4.78% and its face value of $1,000. Fly Away Films has 7,864 of these bonds outstanding. • Equity: Fly Away Films has 4,125,876 common shares outstanding and its stock price is $3.56. Fly Away Films’ beta is 3.1 and its Shareholder’s Equity from the balance sheet is $9.3mm. • Unlevered Free Cash Flow as per the following table: LFY + 1 = $5,500,000 LFY + 2 = $6,250,000 LFY + 3 = $6,750,000 LFY + 4 = $7,298,000 LFY + 5 = $7,854,000 a) Calculate Fly Away Films’ weighted average cost of capital. Please show all your work and round to at least 2 decimal points. b) Perform a discounted cash flow analysis to determine what the intrinsic value of Fly Away Films is on a per share basis. Use the above 5 years of unlevered free cash flow projections and the perpetuity growth rate method to calculate the company’s terminal value. You believe Fly Away Films will grow into perpetuity at a 1.25% growth rate. You note that Fly Away Films has cash of $1,465,264.
You are a conservative investor who is considering investing in “Fly Away Films”, a small film company. You like the intrinsic valuation approach and want to calculate Fly Away Films’ weighted average cost of capital and then perform a discounted cash flow analysis. You note that the equity market risk premium is 5.8%. The risk free rate is 2.5% and the tax rate is 35%. You feel that Fly Away Films is riskier than the
LFY + 1 = $5,500,000
LFY + 2 = $6,250,000
LFY + 3 = $6,750,000
LFY + 4 = $7,298,000
LFY + 5 = $7,854,000
a) Calculate Fly Away Films’ weighted average cost of capital. Please show all your work and round to at least 2 decimal points.
b) Perform a discounted cash flow analysis to determine what the intrinsic value of Fly Away Films is on a per share basis. Use the above 5 years of unlevered free cash flow projections and the perpetuity growth rate method to calculate the company’s terminal value. You believe Fly Away Films will grow into perpetuity at a 1.25% growth rate. You note that Fly Away Films has cash of $1,465,264.
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